China removes Yuan peg!

Picture source: reuters.com

China announced a few days back that it will be removing the Yuan peg (6.38 Yuan to 1 USD), which was implemented during the global crisis in order to shield their exporters.

This decision in my opinion, came as the US has been pressuring China to let its Yuan revalue, citing unfair competition. However even with the unpegging of the Yuan, China said that it is only going to let the Yuan revalue slowly and not let it be a big one time jump.

Some implications for the strengthing Yuan might be:

• China citizens will have a higherpurchasing power, as imports will be cheaper hence indirectly increasing their lfestyle.
• Paper companies in China will stand to benefit. This is because most of their pulp is imported (thus stronger Yuan, means cheaper pulp for the paper companies) and the final product is mostly kept within China.
• Airlines will stand to benefit. Fuel cost which are normally demonited in USD and the cost of buying new Boeing planes will drop (in terms of Chines Yuan)

In my opinion, this might reduce China's competitiveness in the short term as its exports will be more expensive. But in the long term, people will still realise that China's cost is still relatively low, as compared to the rest of the world and hence will be flocking back, when China improves their technology/capabilities. In addition, I feel that the stronger Yuan might help in China acquiring more skills/ technologies from the developed countries too!